Use home as first investment or use HELOC to purchase?

Question

Hello everyone! I’ve been using bigger pockets for a while now and have just been trying to get as much info as possible. I finally feel like I am ready to purchase my first property but I kind of want some feedback first. A little back story: My husband and I were renting a house and after our year lease was up, the landlord decided to let go of the property. We decided to buy it and she was gracious enough to sign the warranty deed over to us. After purchasing the property, we decided to get a HELOC and the house appraised for 3x’s what we paid for it. I should add that we live in Detroit and would like to buy another home for our growing family. I really want to add to our portfolio but I am unsure of what would be the best way to get started. My question is, should I use the HELOC to purchase more properties, should we rent out this home and buy another one, or should we just sell this house? Any advice would be greatly appreciated. Thanks in advance!

David Lee Hall, III · Answer

@Jimmy Lieu

There are many deciding factors on this: interest rate is one, number of origination points is another. Effectively I did both. I used the HELOC to buy the property free and clear. Then, after it was partially paid down, I refinanced my house at a lower rate and actually took out more money from my house due to pay down and appreciating about 50% over 4 years.

There are the questions of how much equity you have, how you plan on using it, is your home appreciating, etc. Perhaps I did not want to re-extend what I had on my personal mortgage at the time of the HELOC. There are a lot of factors that went into the decision in 2013. Not to mention, I didn't even know what BRRRR was at that point, so there was no factor of what was better given BRRRR vs. simple buy & hold.

Sorry this was a generic answer and not a blueprint. :-) You could do either IMO depending on your circumstances and what is available to you with lenders and your credit situation.

Account Closed · Answer

@Laneetra Miller, I did something similar to @David Lee Hall, III. I used a HELOC on my primary to supply the down payment on an investment duplex. The rents more than cover the first mortgage and the HELOC payment. One suggestion I'd make would be to understand the terms of the HELOC well, such as draw period, whether or not the institution will renew the LOC each year, etc.

Laneetra Miller · Answer

@Sarah Brown that is a good idea as well. Thank you!

Laneetra Miller · Answer

@Keyonte Summers Ok, thank you!

Jimmy Lieu · Answer

Hi, I am learning about refinancing. May I ask why you didn't use a cash out refi instead to purchase the rental property? Because wouldn't the HELOC be accruing interest everyday and cash out refi have been the better choice?

I've been told that HELOC is usually better for BRRRs and cash out refis are better for buy and holds. Would love to get your input on this as I am having trouble determining which one is better for what type of scenario.

Laneetra Miller · Answer

@Chad Lanting ok sounds good! Thank you!

Laneetra Miller · Answer

@David Lee Hall, III thanks for your response! That sounds like a good idea and is kind of the route I am most leaning towards.

Keyonte Summers · Answer

If you can stay in the house and purchase a rental with the HELOC I would go that route. But you did say your family is growing so, I would look to rent out the current primary residence.If you havent had any rental income on your tax returns its best to get started sooner than later if you plan on continuing to purchase properties.

Sarah Brown · Answer

I pulled a HELOC on my first property, but did not use it to buy the next. I then bought my next property as an owner occupied so I could save as much cash as possible and turned my current home into a rental. Buying an investment requires a much higher amount of capital than buying a residence. I liked saving as much of my cash as possible and just bought smart, so that I could ensure cashflow when I turned the next one into a rental.

David Lee Hall, III · Answer

@Laneetra Miller

I used a HELOC on my primary residence to buy my first rental. Tenant has not missed a payment in 6 years. With low interest rates, rent covered the payments easily. Eventually my house appreciated and I refinanced before being paid off in full by the rent. I owned the rental free and clear, I then took out a HELOC on it, which I use as an emergency fund for all of my properties so I don’t have to keep huge piles of non- performing cash around.

Use home as first investment or use HELOC to purchase?

Use home as first investment or use HELOC to purchase?

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